A tool in the area of chart analysis is the Ichimoku-Kinko-Hyo-Indicator. It is also known as the Ichimoku cloud indicator and is used to estimate the market situation as well as possible supports and resistances. This article would like to introduce it in more detail.
The inclined reader has noticed it: The analyses by Thomas Hartmann, the head behind the trading school cryptologists, very often refer to the Ichimoku-Kinko-Hyo-Indicator. Certainly not everyone will be able to do anything with it. So this article will explain the indicator as we did with RSI and MACD at the time.
What is the Ichimoku-Kinko-Hyo-Indicator?
The Ichimoku-Kinko-Hyo-Indicator, also known as the Ichimoku Cloud, is an indicator that is used to identify market sentiment and important supports and/or resistances. It consists of various moving averages. This indicator was presented to the public in 1968 by the Japanese journalist Goichi Hosada. However, he has been working on this indicator together with students since the 1930s. Japanese traders and analysts quickly used this indicator. However, it took some time before it arrived in the West.
The picture above shows the chart candles and only the Ichimoku cloud. At first glance it is noticeable that the Ichimoku-Kinko-Hyo-Indicator is comparatively complex and consists of different partial lines. Let’s take a closer look at them!
Meaning of the individual lines
Dark blue is the Conversion Line, known in Japanese as Tenkan-sen. It is a kind of moving average in which the average is formed from the high of the last nine days and the low in the same period. Nine days is the default value, which will be discussed again later. The conversion line is a measure of the market trend. This function as a signal line is the primary use case. It is not a dominant support or resistance line.
Orange is the base line or in Japanese Kijun-sen. It is formed similarly to the Tenkan-Sen and is the average of the 26-day high and the 26-day low. The Kijun-Sen is therefore slower than the Tenkan-Sen. It can be used as a stop loss because it represents a support or a resistance. If the course is above the Kijun-Sen, it is a bullish signal, if it falls below it, it is a bearish signal.
Green is the Lagging Span or the Chikou Span. It simply represents the price or the close values of the day candles, but the values are shifted by 26 days into the past. So the Chikou Span on July 9th is as high as today’s Close-value.
The Kumo Cloud: The Heart of the Ichimoku Kinko-Hyo Indicator
The red, green colored area in the chart is striking. It is also the most famous part of the Ichimoku cloud. This cloud is on the one hand a signal generator. If the price is above the cloud, the general trend is bullish and a price below the cumo cloud is bearish. If the price is within the cloud, the price is currently moving sideways.
Specifically, two lines form the kumo cloud, the violet line and the red line in the chart. These lines are also partial indicators.
Violet is the lead 1, also known as Senko Span A. The value is calculated as an average of Tenkan-Sen and Kijun-Sen and entered in the chart with an offset of 26 days. This means that the Senko Span A reaches 26 days into the future. The Senko Span A forms part of the limit for the so-called Kumo cloud.
Finally, red is the lead 2. Analogous to lead 1, this is also known under the term Senko Span B. Similar to Tenkan-Sen and Kijun-Sen, this is an average of the maximum of the last 52 days and the minimum in the same period. Like the Senko Span A, this partial indicator is entered in the chart with an offset of 26 days. Together with this, the Senko Span B forms the edge for the Kumo cloud.
If Lead 1 rises above Lead 2, the upward movement gains momentum, if Lead 1 falls below Lead 2, the same applies to the downward movement. For this reason, the cloud is green in the first case and red in the second.